Nursing Homes to Absorb $3.87 Billion U.S. Medicare Cut in 2012

Nursing home operators led by Kindred Healthcare Inc. (KND) and Sun Healthcare Group Inc. (SUNH) will see Medicare payments drop by $3.87 billion, following an April proposal designed to remedy overpayments to the industry, the U.S. said. The industry’s shares fell in after-market trading.

The 11.1 percent cut for 2012 announced today follows Medicare’s finding that a new payment system put in place this year let for-profit homes drive up reimbursements for patients. Sun Healthcare dropped as much as 21 percent at 4:46 p.m. New York time in trading after the close of the Nasdaq Stock Market.

The new rates “correct for an unintended spike in payment levels and better align Medicare payments with costs,” according to a statement by Medicare, the U.S. health plan for the elderly and disabled. The American Health Care Association, the industry’s Washington lobby group, said Medicare is moving too fast and that nursing homes have no time to adjust.

The cut “makes reductions beyond what is necessary,” said Mark Parkinson, chief executive officer of the association, in an e-mail. “This drastic reduction will be especially challenging for skilled nursing facilities to manage.”

Following Sun Healthcare, based in Irvine, California, Foothill Ranch, California-based Skilled Healthcare Group Inc. (SKH) was down 16 percent in after-market trading. Kindred, of Louisville, Kentucky, fell 14 percent.

Draft Rules

In the draft rules put out on April 28, Medicare proposed cutting payments to nursing homes by $3.94 billion. A billing provision in Medicare’s new payment system, which went into effect at the beginning of this year, brought the companies $2.1 billion in extra payments, according to a July report by the U.S. Department of Health and Human Services inspector general.

Nursing home groups had lobbied to stop the cuts, or at least shrink them. In a June 24 letter to Donald Berwick, the head of the U.S. Centers for Medicare and Medicaid Services, 152 U.S. House representatives asked the agency to delay cuts and study the issue further.

Medicare wanted to clamp down on a practice allowing nursing homes to categorize patients as getting the most intense services that the program will pay for. This year’s new payment system left a billing code open that allowed nursing homes to bill for higher rates while providing the same amount of service. Companies used that process to avoid lower revenue, according to Medicare.

The regulation shuts down that billing method, according to Medicare. It will also require nursing homes to report in more detail the therapies Medicare pays them to provide.

To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net;

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net.

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